Types of Money Market Instruments

The money market instruments are a segment of the financial market that is used to raise short-term funds from the market. The money market instruments are highly liquid and have short maturity dates. The money market participants borrow and lend money in the short term. These terms range from several days to just under a year. There are numerous money market instruments.

Types of Money Market Instruments

1. Treasury bills

These money market instruments are issued to the governments. They are used to cover government deficits, finance maturity debts, and control the levels of inflation in the country. The selling of these instruments is done on an auction system and at a discount with the value of the bill at its maximum being put into account. The maturity of these money market instruments is usually one year or less. They are also sold in fixed amounts determined by the government. The yield of treasury bonds is determined by the market forces of competitive bidding. These money market instruments are usually risk-free as the government is guaranteed to pay.

2. Certificates of deposit

These money market instruments comprise of certificates issued by a bank or non-bank financial institutions. The certificates are usually for a fixed amount. It also bears the maturity date and a specific interest rate and the currency denomination that was issued. There are numerous forms of certificates of deposit. Normal certificates are issued by local commercial banks. Eurodollar certificates are dominated in U.S dollars or other foreign currencies. It is also issued by your local banks. The other type of these money market instruments is the thrift certificate of deposit. These are issued by non-banking financial institutions such as SACCOs.

3. Bankers acceptances

These are bills of exchange drawn in and accepted by the banks. A bank’s customer under an agreement with the bank draws the bill on the bank and it accepts it. This thus makes these money market instruments bank acceptances. These instruments are most preferred as they can be discounted at any time by the accepting bank. These instruments are usually unsecured and in the event of poor performance, the money can be lost. These money market instruments are often used to finance international transactions. They have a fixed maturity period is between three and six months.

4. Re-purchase agreements

These are money market instruments that are used to increase levels of liquidity. The maturity period is usually fixed or open. Here, the lender and borrower agree on a termination agreement.